CLA-2 R:C:S 557931 MLR
District Director
U.S. Customs Service
Commercial Operations Division
P.O. Box 3130
Laredo, Texas 78044-3130
RE: Application for Further Review of Protest No. 2304-94-100023; Denial of duty-free treatment of sacks and bags
from Mexico under the Generalized System of Preferences
(GSP); printing; laminating; attaching handles
Dear Sir:
This is in reference to your memorandum dated May 20,
1994, forwarding a protest and application for further
review filed timely by Duro Bag Mfg. Co. ("Duro"), which
contests the denial of duty-free treatment to certain sacks
and bags (hereinafter "bags") from Mexico under the
Generalized System of Preferences (GSP). Elizabeth Vann,
Esq., of Kemp, Smith, Duncan & Hammond, P.C., had previously
filed a request for reconsideration dated October 20, 1993,
of Headquarters Ruling Letter (HRL) 557034/557072 dated July
14, 1993, and submitted a sample of the paper and
polypropylene which Duro laminates together in Mexico, and a
sample of the laminated paper which results from the
lamination process. Since the issues in this protest are
the same, we will respond to the arguments made in the
request for reconsideration in this decision.
FACTS:
The facts of HRL 557034/557072 are herein incorporated
by reference; however, the pertinent parts relevant to this
protest are recapitulated below. In HRL 557034/557072,
Customs held that the printing of paper or plastic film
rollstock (hereinafter "rollstock") with colors, designs
and/or customer graphics did
not result in a substantial transformation. Duro claims
that printing the rollstock is a substantial transformation
because sometimes the paper rollstock is printed by a
separate printing company, or Duro may print the paper for
other companies who use the paper for articles other than
bags. Duro indicates that 95 percent of the entries at
issue involve bags that are printed.
After the paper rollstock is printed, it is sometimes
laminated. HRL 557034/557072 also found that laminating the
paper through the gluing/pressure melting of a thin layer of
polypropylene did not constitute a substantial
transformation. Duro states that laminating the paper makes
it stronger and more water resistant, and enhances the
graphics.
After the printing/laminating process, the paper
rollstock is pulled through a converter and formed into a
continuous tube with side folds while being glued at the
seam. Then, the paper is cut-to-length and fanned open to
form a square bottom. Lastly, paste is applied to the right
bottom area and the flaps of the bottom are folded. In the
case of the plastic film rollstock, the plastic is also
pulled through a converter and folded over and heat sealed
to form a tube. Then, air is forced into the tube, and the
two sides of the tube are forced inward by metal plates to
form a gusset. Lastly, the tube is cut to a specified
length and heat sealed at the bottom to emerge as a bag.
HRL 557034/557072 held that these operations constituted a
substantial transformation of the rollstock into a "product
of" Mexico.
Lastly, in HRL 557034/557072, Customs found that the
addition of handles to the bag did not change the essential
character of the bag and was not a substantial
transformation. Duro notes that the handles are installed
onto the bags by assembling two pieces of clipboard near the
top of the bag; folding the top of the bag around the
perimeter of the bag in a width sufficient to cover the
pieces of clipboard; punching holes in the folded tops of
the bag; installing metal grommets into the punched holes
when specified by the customer, and a piece of clipboard
into the bottom of the bag; cutting the macrame material for
the handles to the required length; inserting the cut
macrame through the holes; and tying a knot in the ends of
the macrame to complete the bag. The assembly of the molded
plastic handles to the printed film sack is similar, except
a plastic molded handle is attached to the sack by inserting
each pair of handle anchors through the previously punched
holes, and snapping each anchor together. The record also
includes a letter from The Paper Bag Institute, Inc., dated
May 10, 1993, stating that handle bags are perceived
separately from grocery bags and sacks or other retail bags
commonly referred to as merchandise bags.
Consequently, since HRL 557034/557072 concluded that the
rollstock imported into Mexico and used to produce the bags
was not subjected to a double substantial transformation,
the value of the paper could not be counted towards the GSP
35 percent value-content requirement. Duro remains of the
opinion that printing and laminating the rollstock, and
adding handles to the bag, each, constitute a substantial
transformation.
By General Notice dated August 11, 1995, published
August 30, 1995 in the Customs Bulletin, Volume 29, Number
35, the Customs Service modified HRL 557034/557072. In this
notice, Customs concluded that the printing of paper
rollstock or plastic film with colors, designs, and/or
customer graphics, changes the character of the paper or
plastic film from a raw material with numerous uses to a
material with limited uses to a degree significant enough to
constitute a substantial transformation. However, the
printing of rollstock with labeling information, such as a
UPC label, company logo, or country of origin marking was
not found to result in a substantial transformation of the
rollstock.
ISSUE:
Whether the paper or plastic film rollstock imported
into Mexico and used in the production of the finished paper
and plastic shopping bags/sacks undergo a double substantial
transformation, thereby permitting the cost or value of
these materials to be included in the 35 percent value-content calculation required for eligibility under the GSP.
LAW AND ANALYSIS:
Under the GSP, eligible articles the growth, product or
manufacture of a designated beneficiary developing country
(BDC) which are imported directly into the customs territory
of the U.S. from a BDC may receive duty-free treatment if
the sum of
(1) the cost or value of materials produced in the BDC, plus
(2) the direct costs of the processing operations performed
in the BDC, is equivalent to at least 35 percent of the
appraised value of the article at the time of entry into the
U.S. See 19 U.S.C. 2463(b).
At the time the bags at issue were entered into the
U.S., Mexico was a designated BDC for purposes of the GSP.
See General Note 3(c)(ii)(A), Harmonized Tariff Schedule of
the United States (HTSUS) (1993). The bag was also
considered to be a "product of" the BDC for purposes of the
GSP because the rollstock underwent a substantial
transformation. See 19 CFR 10.177(a)(2). Therefore, the
only issue remaining is whether the rollstock imported into
the BDC undergoes a double substantial transformation in the
BDC, so that its cost or value may be included in the 35
percent value-content computation. That is, the non-Mexican
rollstock must be substantially transformed in Mexico into a
new and different intermediate article of commerce, which is
then used in Mexico in the production of the final imported
article. See 19 CFR 10.177(a); and Azteca Milling Co. v.
United States, 703 F. Supp. 949 (CIT 1988), aff'd, 890 F.2d
1150 (Fed. Cir. 1989).
The test for determining whether a substantial
transformation has occurred is whether an article emerges
from a process with a new name, character or use, different
from that possessed by the article prior to processing. See
Texas Instruments Inc. v. United States, 681 F.2d 778, 782
(CCPA 1982).
Pursuant to the aforementioned General Notice dated
August 11, 1995, published in the Customs Bulletin on August
30, 1995, Volume 29, Number 35, we conclude that the
printing of the paper rollstock or film constitutes a
substantial transformation. However, we note that the
rollstock is also printed so that the bottom of the bag may
contain a UPC label, company logo, and country of origin
marking. We find that such a labeling operation alone does
not result in a substantial transformation of the rollstock.
HRL 557034/557072 also found that cutting and converting
the rollstock into a bag constituted a substantial
transformation. While it appears that the assembly of the
rollstock into a bag does not appear to be exceedingly
complex, upon reconsideration of this issue, we find that in
those instances where the rollstock is printed, cut from
rolls, and may be laminated and/or have handles added to the
bags, the conversion of the rollstock into a bag is not the
type of minimal pass-through operation that should be
disqualified from receiving GSP benefits. Therefore, we
find that the rollstock is subjected to a double substantial
transformation in Mexico if it is printed, cut, and
converted into bags.
Since five percent of the entries involve bags that are
not printed, we must determine whether the operations of
laminating the paper and/or adding the handles to the bags
constitute a substantial transformation. In regard to the
laminating operation, Duro believes that the paper is
substantially transformed into a new and different article
of commerce because the laminated paper is stronger and less
susceptible to tearing and more water resistant. Duro
states that the printing of designs onto the paper must be
completed before the paper is laminated, which indicates
that the lamination changes the characteristics of the
paper. Furthermore, from a commercial standpoint, Duro
states that the laminated paper is considered a different
product with a higher price than the non-laminated paper.
Lamination of Duro's paper also results in a change in
tariff classification from subheading 4804.21.0000 and
4804.39.4020, HTSUS, to subheading 4811.39.4040, HTSUS.
While acknowledging that such a change in tariff
classification is not dispositive of the substantial
transformation issue, Duro contends that it is nonetheless
additional evidence that a substantial transformation has
taken place.
As support that the lamination of the paper did not
constitute a substantial transformation, HRL 557034/557072
cited HRL 730034 dated January 8, 1987, which involved the
joining of silk-screened metal sheets with a foil-laminated
board and the minor cutting of those sheets, and HRL 555156
dated August 8, 1990, which involved the heat and pressure
application of adhesive-backed vinyl or paper to particle
board. Duro believes that its lamination operation is
distinguishable from these rulings because the effect of
laminating a board is minimal compared to the effect of
laminating a piece of paper. Therefore, Duro suggests that
each particular product should be analyzed on a case-by-case
basis.
In general, Customs has determined that laminating,
coating, and encapsulating do not result in a substantial
transformation. In HRL 556301 dated May 4, 1992, Customs
reconsidered a ruling, and determined that copper wire
subjected to drawing, bunching and twisting, annealing, and
encapsulating with polypropylene to form an insulated wire
strand constituted a substantial transformation. However,
the insulated wire strand did not undergo a second
substantial transformation for purposes of the GSP when it
was bundled with others and further encapsulated with PVC to
form cordage. In HRL 734907 dated May 12, 1993, Customs
determined that Canadian-origin vinyl bonded with foam in
the U.S. to produce foam-bonded vinyl did not constitute a
substantial transformation for country of origin marking
purposes. This determination was made because the extent of
the operations performed in combining these materials was
simple and did not require a great deal of skill or time,
and the vinyl still had the appearance and texture of vinyl
after being bonded with the foam. See Belcrest Linens v.
United States, 573 F. Supp. 1149 (CIT 1983), aff'd, 741 F.2d
1368 (Fed. Cir. 1984). Although the foam-bonded material
could be used in the manufacture of automobile seats after
the bonding process, it was the vinyl's outward appearance
and not the foam's which was desired by the manufacturer.
See also HRL 555881 dated May 16, 1991 (pool flats and
kneeling pads made of PVC foam were not substantially
transformed by being coated with a vinyl mixture.)
In this case, although the paper's texture is changed by
the lamination process, this was not found to be
determinative in regard to the laminated particle board,
encapsulated wire, or vinyl-coated pool flats and kneeling
pads. The lamination process does not change the essential
character or the use of the paper to such a degree as to
constitute a substantial transformation.
While the rulings above show that laminating, coating,
and encapsulating do not result in a substantial
transformation, it appears that there are no rulings solely
pertaining to the lamination of paper. However, HRL 544017
dated May 15, 1989, a GSP ruling involving photo albums,
seems relevant. In Mexico, filler pages were produced by
laminating O.P.P. film to the front of manilla paper, gluing
the back of the paper, and folding the paper in half to glue
it together. Next, the sheet was passed through a roller to
remove the air between the paper and the film, and then it
was cut into "unfinished filler sheets." It was held that
the O.P.P. film, latex, and rolls of manilla paper were
substantially transformed in Mexico to form a new and
different article, namely unfinished filler pages. The
unfinished filler pages had a different name and tariff
classification from the constituent materials, and the
character of the materials was changed by the processing.
The materials also underwent a change in use, from raw
materials with multiple potential uses to an unfinished
photo album page, an article with a limited, specific use.
However, the additional processes of cutting these
unfinished filler sheets in half, trimming them on two
sides, and punching them with three holes for use in the
assembly of a photo album did not constitute a second
substantial transformation of the unfinished filler pages,
but rather appeared to be minor finishing operations.
Similar to HRL 544017, the unprinted paper in this case
may be laminated before it is cut, folded, and glued into a
bag. In HRL 544017, it was only after the totality of the
laminating, folding, gluing, and cutting operations that a
substantial transformation was found. Therefore, we affirm
the conclusion reached in HRL 557034/557072 that laminating
alone does not substantially transform the paper.
In regard to the addition of handles to the bags, Duro
claims that HRL 557034/557072 misapplied Uniroyal, Inc. v.
United States, 542 F. Supp. 1026 (CIT 1982), in determining
that the bags were not transformed into a new and different
commercial product. In HRL 557034/557072, it was determined
that the bag, rather than the handles, is the major feature
of customer interest and clearly imparts the essential
character of the bags. In Uniroyal, the court held that the
addition of an outsole in the U.S. to an imported shoe upper
did not result in a substantial transformation for country
of origin marking purposes because this was a minor
manufacturing or combining process which required only a
fraction of the time and cost needed to produce the shoe
upper itself. Rather, the completed upper constituted the
"very essence" of the completed shoe. Duro claims that
Customs reliance upon Uniroyal ignored other rulings such as
HRL 952886 dated December 8, 1992, where the country of
origin of certain footwear was determined to be Korea,
although the footwear was made with uppers manufactured in
the Peoples Republic of China, because the uppers were
completely open and without a specific shape. Furthermore,
Duro notes that in HRL 952886, it was acknowledged that
under the HTSUS the upper in Uniroyal would not be
considered as having the essential character of footwear.
In regard to Duro's position, we remain of the opinion
that the bag form imparts the essential character of the bag
rather than the handle. This determination is also
consistent with HRL 952886 where the upper without a
specific shape (i.e., without "essence") was found to be
substantially transformed by the attachment of an outsole.
Next, Duro cites Ferrostaal 664 F. Supp. at 537-538,
where the court indicated that the "essential character"
test was not intended to replace the "name, character and
use" test in determining whether a substantial
transformation has taken place. We agree that the name,
character and use test is entitled to continued adherence in
view of its affirmance in recent opinions by the appellate
court, and should be determinative of the country of origin
of imported articles. See Ferrostaal 664 F. Supp. at 538;
and National Hand Tool Corp. v. United States, No. 92-62,
slip. op. at 9 (CIT April 27, 1992). Based on this test,
the addition of handles to the bag "form" may change the
name from a grocery bag or merchandise bag, to a handle bag;
however, these articles still share the common description
of a "bag." Regarding the change in character, although the
bags have the added feature or characteristic of a handle,
the bags' identity or composition as bags remains the same.
See National Hand Tool slip. op. at 9, where the court held
that although microstructural changes of the heating process
may have changed the characteristics of the material, the
chemical composition of the material did not change.
Regarding the change in use, although the bags are easier to
carry, we do not believe this circumstance constitutes a
substantial change in the use of the bags for purposes of
finding a substantial transformation. The use of the bag,
with or without a handle, is to carry merchandise.
Duro also alleges that Customs ignored the numerous
distinctive steps and time required to assemble the handles
to the bag forms in comparison to the manufacture of the bag
forms alone, which Uniroyal addressed. Duro states that the
installation of the handles requires skill, attention to
detail, quality control, and a substantial capital
investment because of the sophisticated machinery used.
Duro also points out that Uniroyal was specifically
distinguished from United States v. Gibson-Thomsen Co.,
Inc., 27 CCPA 267 (1940), in which wooden toothbrush handles
and brush blocks imported for use in the manufacture of
tooth and hair brushes were found to be substantially
transformed into a new and different article of commerce.
The cost of the bristles and the labor costs involved in
inserting the bristles in the U.S. were found to be
significantly higher than the cost of the imported handles.
Duro, therefore, suggests that the holding in Uniroyal could
have been different if the time and cost required to add the
outsole to the shoe upper had been significant compared to
the time and cost required to manufacture the shoe upper.
Duro also believes that the installation of handles onto
the bags is distinguishable from the addition of handles to
a finished piece of luggage, a procedure which Uniroyal
considered to be akin to the addition of outsoles to the
shoe uppers, because the time and cost required to add
handles to a finished piece of luggage would be minimal
compared to the time and cost required to manufacture the
luggage itself. Duro also states that as a practical
matter, a piece of luggage without handles is useless. By
contrast, Duro's bags without handles have a specific use
and are marketed for that use.
In HRL 557034/557072, the factors examined in Uniroyal
were noted as: (a) a comparison of the time involved in
attaching the outsole versus the time involved in
manufacturing the upper, (b) a comparison of the cost
involved in the process of attaching the outsole versus the
cost involved in the process of manufacturing the upper, (c)
a comparison of the cost of the imported upper versus the
cost of outsole, and (d) a comparison of the number of
highly skilled operations involved in both processes. Based
on this criteria, it is our opinion that although the
handles are attached manually, and, therefore, require more
time than the manufacture of the bags, the steps are quite
simple and constitute minor combining processes. In
addition, the cost of converting the rollstock into bags
does not appear to be insignificant, especially when
considering the capital investment required for this
purpose.
Furthermore, we note that although the court in
Ferrostaal 664 F. Supp. at 664, recognized the value added
to the imported product, and the court in Superior Wire v.
United States, 669 F. Supp. 472, 478 (CIT 1987), aff'd, 867
F.2d 1409 (Fed. Cir. 1989), treated the cost added, amount
of labor, and capital investment as a cross-check in
substantial transformation cases, the name, character and
use test is entitled to continued adherence. Consequently,
while Duro may view the value added and time required to add
the handles to the bags as significant, "there must be
transformation; a new and different article must emerge,
'having a distinctive name, character, or use.'" Ferrostaal
664 F. Supp. at 537, citing Anheuser-Busch Brewing Ass'n v.
United States, 207 U.S. 556, 562 (1908).
Duro claims that its situation is analogous to C.S.D.
93-2, where Customs held that the labor intensive hand-cutting operations performed on uncut crystal stemware
"blanks", which affected approximately 80 percent of the
glass and increased the value over 500 percent, resulted in
a substantial transformation into a new and different
article of commerce. Duro states that although the addition
of the handles affects only a small portion of the surface
area of the bag, the addition of the handles significantly
increases the value of the bag and provides it with a new
commercial use. In regard to this argument, we note that
Customs has considered several cases concerning the cutting
of crystal, and has basically decided each case based on the
extent of the cutting operations. As discussed above, we do
not believe that the processes of attaching the handles are
so significant as to result in a substantial transformation.
Instead, we again find HRL 544017 to be relevant. Just as
the additional cutting, trimming, punching, and assembly
operations did not constitute a second substantial
transformation of the unfinished filler pages, we find that
the assembly of the handles does not result in a substantial
transformation of the bag, whether or not it is made from
laminated paper.
We also note that the Explanatory Notes to heading 4819,
HTSUS, indicate that the "articles of this group may be
printed, e.g., with the name of the merchant.... The
articles of this heading may also have reinforcements or
accessories of materials other than paper (e.g., string
handles...)." Consequently, the addition of handles to a
bag does not result in a change in tariff classification.
Duro also claims that Customs ignored the fact in HRL
555156 that laminating and cutting the particle board
constituted a substantial transformation of the board, and
that the subsequent assembly of the laminated pieces to form
finished speakers constituted a second substantial
transformation of the particle board. Duro states that as
in HRL 555156, it starts with a raw material (i.e., paper or
plastic rollstock) which is printed and/or laminated, cut to
shape, and assembled. Duro states that their operations go
even further because handles are added to the bags. In
addition, Duro indicates that in HRL 555156, Customs stated
that although the final assembly of the speakers did not
appear to be exceedingly complex, in view of the overall
processing accomplished in Mexico, such assembly was not the
type of minimal pass-through operation that should be
disqualified from receiving GSP benefits. Therefore, Duro
claims that the installation of handles to its bags is not
merely a pass-through operation.
In Texas Instruments, the court suggested that in
situations where all of the processing is accomplished in
one GSP beneficiary country, the likelihood that the
processing constitutes little more than a pass-through
operation is greatly diminished. Consequently, if the
entire processing operation performed in the single BDC is
significant, and the intermediate and final articles are
distinct articles of commerce, then the double substantial
transformation requirement will be satisfied. Such is the
case even though the processing required to convert the
intermediate article into the final article is relatively
simple and, standing alone, probably would not be considered
a substantial transformation. In this case, while the bags
made from laminated or unlaminated paper rollstock are
clearly distinct articles of commerce, we do not find that
handle bags as compared to bags without handles, are
distinct articles of commerce for purposes of the GSP double
substantial transformation requirement.
HOLDING:
Based on the information and samples provided, pursuant
to the General Notice dated August 11, 1995, published in
the Customs Bulletin on August 30, 1995, Volume 29, Number
35, we conclude that the printing of the paper rollstock or
film with a particular customer name, design, or color, and
not just a labeling operation, constitutes a substantial
transformation. Furthermore, we find that the cutting and
conversion operations result in a second substantial
transformation of the paper or plastic film rollstock.
However, we do not find that the paper is substantially
transformed as a result of the laminating process alone; nor
do we find a substantial transformation of the bags as a
result of the addition of the handles. Therefore, the cost
or value of the paper or plastic film rollstock may only be
included in the 35 percent value-content requirement to
qualify for duty-free treatment under the GSP, if it is
printed, cut and converted into bags. Accordingly, this
protest should be granted and denied in part.
In accordance with Section 3A(11)(b) of Customs
Directive 099 3550-065 dated August 4, 1993, Subject:
Revised Protest Directive, this decision should be attached
to Customs Form 19, Notice of Action, and be mailed by your
office to the protestant no later than 60 days from the date
of this letter. Any reliquidation of the entry in
accordance with the decision must be accomplished prior to
mailing the decision. Sixty days from the date of the
decision the Office of Regulations and Rulings will take
steps to make the decision available to customs personnel
via the Customs Rulings Module in ACS and the public via the
Diskette Subscription Service, Freedom of Information Act
and other public access channels.
Sincerely,
John Durant, Director
Commercial Rulings Division